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Australia, NZ: Shares fall, banks hit as weak inflation data revive rate cut talk

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[SYDNEY] Australian shares dropped 0.6 per cent on Wednesday, reversing gains from earlier in the day, with banks leading losses as the Australian dollar fell on prospects of a rate cut following surprisingly weak inflation data.

The S&P/ASX 200 index fell 32.94 points to 5187.70, down from a near four-month peak touched earlier in the session. The benchmark is down almost one per cent so far this week.

Brokers said given that the market had climbed sharply over the past few weeks from 4,900 to top 5,200, spurred by a rebound in commodity prices, a pull back was inevitable.

"There's been a bit of reality check after a solid run-up," said James McGlew, a dealer at Argonaut Securities.

CMC Markets strategist Ric Spooner said there may have been some late selling by offshore investors after the Australian dollar slumped to 76 US cents on heightened expectations of a rate cut after unexpectedly weak inflation numbers.

"It's not unusual to see portfolio selling of equities when international investors become concerned about a sharp currency move down," Mr Spooner said.

Brokers also said investors may be selling ahead of bank reporting season next week, on concerns about a blowout in bad debts and views the banks' margins may come under pressure if they have to pass on any rate cut in full to blunt a political backlash.

New Zealand's benchmark S&P/NZX 50 index fell 0.7 per cent or 45.32 points to finish the session at 6,750.40, well off a record of 6,917.57 touched last week.